The Sum of Experiences

This note was originally published at 8am on March 29, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss


I’m sure after reading the quote above, especially after reading yesterday’s declaration of the Bernanke War, you are wondering if Keith has gone soft.  Well, since I’ve known Keith for upwards of 15 years, I can say categorically he hasn’t gone soft, but he has handed the proverbial hockey stick on today’s Early Look to me as he is flying up to Thunder Bay, Ontario.


Yesterday, we had a long internal debate about branding and marketing.  The key questions, which of course are similar for your organizations, related to who we are, who we want to be, and what people actually think we are.  These are challenging questions for any organization, especially one that perceives itself to be the standard bearer for Wall Street 2.0.


Naturally, being the social media addict that I am, after our meeting I posed the question to the Twitter Sphere.  Specifically, I tweeted:


@HedgeyeDJ Question for the day: What is a brand?


The best answer actually came from a good friend and former colleague who tweeted back that “a brand is specifically the *perceived* sum of all the experiences, actual and emotional, associated with your brand.”  If you think about it, that’s not totally dissimilar to a stock price or stock index price.  It is actually the sum of all fundamental inputs, plus the behavioral or emotional input of market participants.


In the Chart of the Day, we actually emphasize that last point in looking at Chinese equities.  The Shanghai Composite, which is a capitalization weighted index which tracks all A-shares and B-shares listed on the Shanghai Stock Exchange, is at a 10-week low.  Further, the index is only up +3.9% in the year-to-date and is down -22.5% in the last year.  In as much as China is a proxy for global growth, as one of the world’s fastest growing and largest economies, the performance of Chinese equities is a little disconcerting. 


The next key catalyst for the Chinese economy is Chinese PMI, which is out this Saturday.  Ahead of that, as is typical before disappointing Chinese data, rumors are circulating that China will implement another reserve requirement ratio cut.  In theory, this action will free up money supply within the Chinese banking system.  My belief is if the Chinese indeed have to ease again, then it is probably ominous for the Chinese growth outlook.   Incidentally, the last time the Chinese cut the “RRR” was on the weekend of February 19thand the Shanghai Composite is literally in a straight line down since then.


For those that are looking for bullish global growth catalysts, you need to look no further than Morgan Stanley and HSBC.  This morning Morgan Stanley upped its China GDP growth forecast to 9.0% from 8.4%, while HSBC raised its price targets for all major Chinese indices.   HSBC may be on to something as slowing growth is starting to, obviously, be priced into Chinese equities.  As for Morgan Stanley, I’m not sure what they are feeling (or smoking for that matter).


The other key data points from global macro land this morning come from Europe.  As usually occurs when austerity is implemented aggressively, a general strike is underway in Spain this morning.  Interestingly, neither strikes, especially those that result in clashes with the policy, nor austerity are all that positive for economic growth.  I dare say that Spain is starting to look a little like Greece, but don’t take my word for it.  According to the head of the Spanish Banking Federation, “the strike takes us a lot closer to Greece and farther from Germany.”


For starters, I’m not sure Spain was ever all that close to Germany, except perhaps by plane or high speed train.  Germany’s unemployment rate fell -18,000 in March versus an estimate of -10,000 and the unemployment rate is now at 6.7%, which is a 20-year low.  Conversely, the Spanish unemployment rate is just shy of 23%. 


Also, unlike Germany, Spanish credit default swaps have accelerated dramatically recently.  In fact, Spanish 5-year CDS are now trading at 423 basis points, which is up more than 14% since the start of the month.  While still below the all-time high, this measure of risk certainly agrees with the idea that Spain is moving closer to Greece than Germany.  Incidentally, Spain Housing permits were down -25% year-over-year this morning, as well.


I’ll leave you with one last thought this morning from an email my colleague Darius Dale just sent to our team:


“Global cross-asset volatility hasn’t been this low since OCT ’07. Terrifying. Unless, of course, this time is different and we’ve reached “escape velocity”. Bernanke’s war has begun; we’re either off to the races from a growth perspective or things are about to get weird. You have to pick sides at these levels of investor complacency.”


Weird? Indeed.  Almost as weird as starting a Wall Street morning strategy note with a quote from Dr. Seuss.  Or, perhaps, that is all part of the brand . . .


Our immediate-term support and resistance ranges for Gold, Oil (Brent), and the SP500 are now $1652-1689, $122.12-124.96, and 1391-1419, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Sum of Experiences - Chart of the Day


The Sum of Experiences - Virtual Portfolio


The Macau Metro Monitor, April 12, 2012



SANDS LOT 3 COULD BE OPEN IN THREE YEARS Macau Business, Macau Daily Times

LVS Chairman Sheldon Adelson says the piling works on lot three in Cotai could be in by year-end.  Adelson added that it could then take up to 30 months for the property to be completed.  Adelson disclosed that the company had so far spent US$ 4.4 billion to develop the Sands Cotai Central project and more will be invested.  LVS will have invested as much as US$5 billion when the fourth tower of the Cotai Central is complete in 2013.

LVS COO Michael Leven said that the courts are still deciding where the Steve Jacbos lawsuit should take place – Macau or Las Vegas.  
“Our opinion is that the lawsuit should be in Macau,” Leven said.  “When that happens then it will progress to discovery, and that will probably take another six or eight months, another year or so, it's going to go on for a long time.”


Sands Macau CEO, Edward Tracy, stressed that the casinos on the Cotai Strip were different from those on the Macau Peninsula, especially those closer to the Barrier Gate where visitors tend to stay a shorter period of time and only engage in gaming.  Those on the Cotai Strip have more leisure and entertainment elements and would not be in direct competition with casinos elsewhere.  Tracy expected visitors to the resort to stay longer in order to enjoy leisure and shopping activities.  He estimated that the average time of stay by visitors to Macau would reach 3.6 days in five years’ time, compared with the current 1.5 days.



Secretary for Economy and Finance Francis Tam said the growth of Macau’s gaming revenue in Q1 is in-line with expectations despite a slowdown.  He says that the government has approved 200 new gaming tables to Sands Cotai Central, and will maintain Macau’s total number of gaming tables within 5,500 by 2013.  There were 5,302 gaming tables in Macau as of the Q4 of 2011.


SJM CEO Ambrose So says he is expecting gaming revenue growth to grow double-digits in 2012. 



A Hong Kong junket operator filed a lawsuit in Japan against the former chairman of leading paper manufacturer, Daio, for failing to repay a debt of HKD 110 million (Yen 1.1 billion) he owed to the junket operator and subsequently lost in a Macau casino in 2010.

Ikawa Tomotaka, former chairman of Daio Paper, borrowed the money from “Million Win Investments Limited”, on separate occasions two years ago.  The Japanese businessman promised to settle the debt last year but only paid about one-tenth of the amount.  As a result, the junket operator decided to bring the case to court in Tokyo, according to Japanese newspapers.  In an attempt to repay the debt, the ex-chairman borrowed a total of approximately Yen 5.5 billion in unsecured loans from seven subsidiaries of Daio Paper from March to September last year and caused substantial financial damage to these affiliated companies.



Chinese banks lent 1.01 trillion yuan ($160.1 billion) during March, much higher the 880 billion yuan that the Street was expecting.  


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Credibility's War

“Indeed, policies such as competitive currency devaluations risk unleashing a wave of destructive protectionism.”

-Dennis C. Blair, US Director of National Intelligence (February 2009)


On my flight back to New York last night I was reviewing my institutional client meetings in Denver and Kansas City and thought to myself, God help us all if Ben Bernanke continues to engage in this currency war against US Consumers and Savers.


Since the word war is not one you want to bark out loud on a US flight, I decided to keep it to myself and keep thinking. Jim Rickards’ recent book, Currency Wars, provides an excellent historical perspective on why using that word didn’t come out of thin air.


In addition to the aforementioned quote from the US Director of National Intelligence, Rickards starts Chapter 3 “Reflections on a Golden Age” (page 37) with the following quotes:

  1. “We’re in the midst of an international currency war.” –Guido Mantega, Finance Minister of Brazil (2010)
  2. I don’t like the expression currency war.” –Dominique Strauss-Khan, Managing Director IMF (2010)

Well, I don’t like DSK and I couldn’t care less what he, or any of his conflicted and compromised cronies of the Keynesian Kingdom, think about our expressions. American Patriots, Unite. We are fighting for the credibility of our currency.


Back to the Global Macro Grind


If there’s ever been a morning where the currency war is on the tape, it is this morning:


1.       FED – in a central planning speech in NYC last night, Bernanke’s pandering Fed Head from San Francisco, Janet Yellen, said “I consider a highly accommodative policy stance to be appropriate in present circumstances.”  (must be hard times at Facebook – great depressions perhaps in Southern California too?)


2.       BOJ – mincing zero words on currency war, the Bank of Japan’s equivalent of Bernanke, Masaaki Shirakawa, stated plainly that “The BOJ will pursue powerful easing.”


Powerful words from un-elected, but very powerful and politicized people.


The Japanese Yen, of course, went down on that – but the US Dollar didn’t. Why? That’s simple – this is war. As I am sure Einstein would agree, Credibility’s Currency War amidst the 3 major fiat currencies of the world (USD, EURO, YEN) is relative. For politicians at least, it’s a short-term race to the bottom.


Plenty of the Fed’s excuse makers say “there’s a difference between correlation and causality.” That must be a one-liner they are teaching at Western business schools or something because it certainly doesn’t apply to what’s actually going on in markets right now. We have plenty of causality (monetary policy) and plenty of correlation risk – ask anyone who trades in real-time.


A simple illustration of long-term causality is in our Chart of The Day. This is The Policy To Inflate Mechanism of Keynesians:

  1. 10-year chart of the Federal Reserve’s Balance Sheet (Total Assets/GDP)
  2. 10-year chart of the ECB’s Balance Sheet (Total Assets/GDP)
  3. 10-year chart of the Bank of Japan’s Balance Sheet (Total Assets/GDP)

What you’ll quickly notice in this chart is that one of these lines (Japan’s red line) is not like the others. That’s because Japan, under the un-qualified academic advice of Paul Krugman in 1997 to “Print Lots of Money”, actually listened to the Keynesian and went on, and on, and on with  “Quantitative Easing” until 2006.


Why did the BOJ stop printing money in 2006?


Take a wild guess. Because the said elixir of Quantitative Easing did not work.


Subsequent to 2006, both the ECB and Fed (the blue lines in the chart) decided to start acting Japanese, printing moneys in 2007 and 2008, respectively. Since then, the currency war between Europe and the United States of America has gone on, and on, and on.


The only people that I know that think this Keynesian experiment (with other people’s money) gone bad is going to ultimately end well are people who are paid to be willfully blind to its economic gravity.


To suggest that this 10-year chart of money printing and explicit Policies To Inflate has nothing to do with all-time record highs in food and energy prices (2008-2012) is a professional embarrassment.


If you want a solution to this Global Economic mess, it’s the Monetary Policy, Stupid. There has never been a country, in world history, that has debauched their currency’s credibility and achieved long-term economic prosperity.


So, next time you hear someone like Janet Yellen, Ben Bernanke, or some other conflicted and compromised European or Japanese politician tell you that this time is going to be different – please remind them, for the sake of our kids, that never is a long time.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1, $119.04-122.64, $79.61-80.26, $80.03-83.12, $1.29-1.32, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Credibility's War - Chart of the Day


Credibility's War - Virtual Portfolio


TODAY’S S&P 500 SET-UP – April 12, 2012

As we look at today’s set up for the S&P 500, the range is 36 points or -1.00% downside to 1355 and 1.63% upside to 1391. 












    • Up from the prior day’s trading of -2133
  • VOLUME: on 4/11 NYSE 790.20
    • Decrease versus prior day’s trading of -18.72%
  • VIX:  as of 4/11 was at 20.02
    • Decrease  versus most recent day’s trading of -1.81%
    • Year-to-date decrease of -14.44%
  • SPX PUT/CALL RATIO: as of 04/11 closed at 2.04
    • Increase from the day prior at 1.52 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 2.03
    • Down from prior day’s trading of 2.04
  • YIELD CURVE: as of this morning 1.74
    • Decrease from prior day’s trading at 1.75 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:15am: NY Fed’s Dudley speaks in Syracuse on economy
  • 8:30am: Trade Balance, Feb., est. -$51.8b (prior -$52.6b)
  • 8:30am: PPI (M/m), Mar., est. 0.3% (prior 0.4%)
  • 8:30am: Jobless Claims, week of Apr. 7, est. 355k (prior 357k)
  • 9am: ECB Executive Board member Peter Praet speaks in New York
  • 9am: Atlanta Fed’s Lockhart will moderate panel discussion on U.S.-Mexican relations at Atlanta Fed
  • 9:45am: Bloomberg Consumer Comfort, week of Apr. 8
  • 10am: Freddie Mac mortgage rates
  • 10am: New York Fed’s Cumming, Fed Board’s Liang speak on panel on financial reform proposals at conference in New York
  • 10:30am: EIA natural gas
  • 11am: NY Fed’s Dudley speaks in Syracuse on the economy
  • 12:30pm: Philadelphia Fed’s Plosser speaks on economic outlook to National Economists Club in Washington
  • 1pm: Minneapolis Fed’s Kocherlakota speaks to Chamber of Commerce in White Bear Lake, Minnesota
  • 1pm: U.S. to sell $13b 30-yr bonds (reopening)
  • 2:35pm: NY Fed’s Dudley visits medical device manufacturer in Skaneateles Falls, NY
  • 3:30pm: Fed’s Raskin speaks in Los Angeles on the economy 


    • Federal Election Commission considers request from Sen. Dianne Feinstein’s campaign to waive contribution limits, allow replacement of millions of dollars lost in embezzlement scheme
    • VP Joe Biden holds town hall in Exeter, N.H. noon
    • IMF Managing Director Christine Lagarde speaks at the Brookings Institution, 11am
    • White House conf. to preview Barack Obama’s participation in 6th Summit of the Americas in Cartagena, Colombia, 9am
    • Adm. Jonathan Greenert, chief of naval operations, speaks at National Press Club, 7:30am 


  • Trade deficit in the U.S. may have retreated in February as imports cooled from a record, economists est.
  • Google releases results after the close of trading; watch cost-per-click, click-through rates
  • Federal Reserve Vice Chairman Janet Yellen endorses view that borrowing costs likely to stay low through 2014
  • BlackRock plans to start a bond-trading system that will allow investors to bypass investment banks
  • Roche reiterates it seeks talks with Illumina, says publicly available info doesn’t justify higher price
  • Shell deploys oil-spill response vessel after finding “a light sheen” of oil between Mars, Ursa production areas in Gulf of Mexico
  • Oaktree Capital raises $380.2m in IPO, bringing in about 27% less than originally sought
  • Sony will cut 10,000 jobs, about 6% of its workforce, two days after reporting record loss
  • Wal-Mart hosts investor meeting in Toronto
  • Nokia slides for second day as analysts cut price targets following profit warning
  • FDA advisory panel recommends whether to tighten approval standards for breast transilluminators, how to classify blood irradiators
  • North Korean makes final preparations for missile launch 


    • Cogeco Cable (CCA CN) 5:59 a.m., C$0.98
    • Rite Aid (RAD) 7 a.m., $(0.14)
    • Eldorado Gold (ELD CN) 7 a.m., $0.18
    • Corus Entertainment (CJR/B CN) 7 a.m., C$0.37
    • Fastenal (FAST) 7:50 a.m., $0.34
    • Commerce Bancshares /MO (CBSH) 9 a.m., $0.67
    • Novagold Resources (NG CN) 9:15 a.m., C$(0.05)
    • JB Hunt Transport Services (JBHT) 4 p.m., $0.52
    • Google (GOOG) 4:01 p.m., $9.64
    • Bank of the Ozarks (OZRK) 6 p.m., $0.51     


  • Top Analysts See Copper Rising Even as China Slows: Commodities
  • Palm Oil Drops Most in Two Months as U.S. Soybean Acres May Gain
  • Oil Advances to One-Week High After U.S. Fuel Stockpiles Decline
  • Copper Rises for Second Day on China Policy-Easing Speculation
  • IEA Sees Oil Market Better-Supplied for First Time Since 2009
  • Gold May Decline as Traders View U.S., Europe Stimulus Unlikely
  • Sugar May Fall on Brazil Production Speculation; Cocoa Drops
  • Commodities Will ‘Drift Lower’ as Stimulus Ends, UBS Says
  • Indonesia’s Mineral-Ore Ban Probably to Be Diluted, S&P Says
  • Thai Sugar Output May Climb to Record on Yields, Board Says
  • German Power’s Longest Slump Squeezes EON, RWE: Energy Markets
  • Argentina Stifles Shale Oil Interest With Seizure Threat: Energy
  • Gold Holdings Signal Slump, Credit Suisse Says: Chart of the Day
  • IEA Says Crude Market Is Better Supplied
  • Corn, Wheat Advance as Freezing Weather Threaten U.S. Crops
  • Shell Falls Most in Two Months on Gulf of Mexico Oil-Leak Probe
  • Trafigura to Buy $130-Million Stake in Indian Oil Refinery 





US DOLLAR – sheepishly, the Fed’s Janet Yellen gave a speech in NYC last night that said what she always says – she’s all for devaluing the US Dollar until she’s told to retire. USD not moving much anymore on these comments; maybe because it hasn’t worked; maybe because political change is coming – we will see. Currency War is on.






EUROPE – certified train wreck in motion in Spain and Italy again with both stock markets following their respective bond markets (lower); Italian bond auction yielding 3.89% (vs 2.76% last) on 2015 notes – and get this, the Japanese say, hey, we have our own issues, we aren’t buying pig paper.






JAPAN – the BOJ’s Shirakawa said exactly what we have been saying he’s ultimately going to have to say “The  BOJ  WILL  PURSUE  POWERFUL  EASING” – that’s the go to Bernanke move (Policy to Inflate), and it stopped Japanese Equities from going down for the 1st day in 9 (+0.7%); Yen down on that obviously, but can go down a lot more.










The Hedgeye Macro Team



Despite dollar weakness, macroeconomic concerns contributed to what was a soft week for commodity prices.  Grains, coffee, chicken and dairy all declined on the week with hogs, soybeans, and rice posting modest gains.  Chicken wings were flat on the week but are now up 110% versus this time last year.  The most important take away from this note is that BWLD is, in our view, going to have to add one incremental topic to its upcoming EPS call: chicken wing prices.  The recent presentation at the TAG conference, incredibly, bore no mention of the company’s most important input cost.







As we near the high-traffic summer season, the topic of gas prices is continuing to feature in news reports and the conversations of everyday Americans.  As the national average retail gasoline price is currently just below $4, having increased through 2012 to-date in an expeditious manner.  Much of the resulting negative impact has been mitigated by the favorable weather that has boosted economic activity but weather is no longer a significant factor in the data. 







WEN: Obviously, we're all watching gas prices carefully and – but consumers seem to quite honestly have digested that quite nicely.


BAGL: If employment continues to be positive, again from my perspective, I think that sort of offsets any impact that you might get – we might get on gas prices … That said, if employment tightens up or we don't see continuously positive momentum than longer-term, obviously, if we get a $5 gas price, that's one of those price points that hits overall.


CBRL: We think that given our susceptibility particularly to – in the summer travel season to potential increases in gasoline prices that it is appropriate to be suitably cautious about our third and fourth quarter traffic outlook.


DRI: Yes, I would say as we look back, we don't think the current levels, the $4 current gas prices, no longer represents sticker shock.


SONC: We've seen a rising employment, declining unemployment – consumer confidence has improved somewhat, but at this point, I wouldn't say that we've seen a negative impact from gas prices that we can discern.







Supply: Producers are facing obstacles to ramp up herd sizes in still-elevated feedstuffs and gasoline prices.


Demand: On April 6th, beef prices hit an eight-month low as the “pink slime”, or lean fine-textured beef, controversy and economic concerns weighted on demand expectations.  Today, prices are rising as speculation mounts that export demand for U.S. beef may increase. 


A survey of cattle-industry leaders suggests the average price for cash cattle will continue its recent decline, down another 91 cents to $120.99 per cwt this week.


Comments: One interesting data point we read this week is that it takes the net revenue from roughly six calves to cover the development and production costs of each replacement heifer. 





Supply: According to the International Coffee Organization, coffee production for the season started in October will be 1.9% higher than estimated a month ago.


Demand:  News reports during the last week highlighted the weaker dollar as lifting investor demand in coffee, cocoa, and sugar.  J.P. Morgan said today that global coffee demand may accelerate to 2% in 2012/13 after falling by 1% a year earlier because of “adverse macroeconomic conditions”.  We are not going with that call at this point, given our Macro Team’s outlook. 


Comments:  Falling coffee prices are good for company margins as long as demand is not falling so fast as to impact sales to a significant degree.  Starbucks has its coffee needs locked into fiscal 2013.





Supply: Egg sets placements continue to contract at around the same rate, -6%, according to the Broiler Hatchery report released by the USDA today. This implies that supply will remain tight as the industry looks for more favorable business conditions before expanding production.  As the chart below shows, supply is not showing any clear signs of picking up.



WEEKLY COMMODITY CHARTBOOK - egg sets wing prices





















WEEKLY COMMODITY CHARTBOOK - chicken whole breast









Howard Penney

Managing Director


Rory Green



Early Look

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